Choice and opportunity costsEvery decision you make, every resource you use carries opportunity costs—alternatives that you’ve given up because of a decision—including the opportunity to have made any of infinite alternative, foregone decisions.

Those opportunity costs can also be measured in terms of the value—cash, moral, sentimental, status, etc.—of what your resource could have gotten you if expended differently.

The Costs of [Calculating] Costs

What is a bit of a mind-bender to consider—both in terms of its logic and its practical implications—is determining the costs, including opportunity costs, incurred by calculating your opportunity costs, instead of doing something else.

Because an opportunity cost of calculating opportunity costs is a cost of calculating costs, it can be called a “meta-opportunity cost”.

If, apart from the opportunity costs, the pure costs of calculating your opportunity costs are considered, e.g., time, energy and other resources, they can be called “meta-costs” of calculating opportunity [or other] costs, because they are, at the risk of putting it simplistically, “costs of incurring or calculating costs”.

As an example of the cost of incurring a cost, consider the employee who bails on work, phones in sick and goes skiing. The cost of incurring the cost of ski-lift tickets will be his job, if he’s caught.

The opportunity and other meta-costs of calculating opportunity coast are just as easy to imagine: Suppose you’ve found a great candidate who, for now, is interested in the job you’re shopping, but who also has other offers.

If instead of sealing the deal with him, you decide to keep looking or to carefully review the costs and benefits of hiring any of the other candidates, you will incur opportunity costs associated with that decision to do comparative calculations of opportunity costs instead of making the decision to hire him on the spot.  

If the candidate signs elsewhere while you are deliberating, the lost opportunity to hire him is an obvious opportunity cost—and perhaps the largest among the possibilities.

At the same time, you must factor in other kinds of costs of calculating your opportunity costs, including the time you have to put in calculating them.

Such perfectly commonplace situations, which sometimes unfold as painful dilemmas, raise the very uncommon questions of when the opportunity costs and other meta-costs of calculating opportunity costs are too high and whether we can calculate the costs of calculating opportunity costs.

Decision Costs vs. Resource Costs

In my earlier analysis, You Think You Understand Your Opportunity Costs?”, I argued that “opportunity costs” should not be confused with “costs of an opportunity”. You buy a movie ticket for $10. It cost you $10 to get the opportunity to see that movie. Hence, that was the cost of that opportunity. But, suppose you could have gone to a $25 New Year’s Eve dinner at your favorite restaurant for free instead. That dinner was the opportunity cost and was worth $25, representing a net  opportunity cost of $15 [$25 minus the $10 that would be spent either way].

I also argued that the “opportunity cost of a decision” must be distinguished from “the opportunity cost of a resource”. For example, the decision to call and propose marriage to Jacqueline in France instead of Jill next door makes the foregone marriage with Jill a non-dollar-denominated opportunity cost that may be huge in terms of foregone value and benefits, compared with marrying Jacqueline.

But the opportunity cost of the $5, as a resource spent on the international call placed to Ariel, is unlikely in the extreme to be comparably huge in dollar-denominated terms, unless it were spent on what turned out to be the mega-jackpot winning lottery ticket that would have been bought instead. More likely, the largest opportunity cost will be a $5 burger-combo somewhere.

Is There an Opportunity Cost-Calculator Formula?

Now, whether or not there is an objectively confirmable formula for determining meta-costs, we all seem to behave as though such a formula exists, every time we make a decision to

  • Calculate our opportunity costs, or not to do so [e.g., when postponing a hire in order to assess the opportunity costs of that prospective hire vs. making an immediate hire]
  • Incur costs created by incurring other costs [for example, as in the case of the truant employee, if the cost of his ski-lift ticket also costs him his job].

It’s as though we instantly and unconsciously solve linear programming problems to find an optimal choice, much as we do when choosing the best path down an icy hill.

True, this decision process about how to best allocate our time, energy, etc., seems instinctive or intuitive. But if you reflect on paths you’ve taken—on icy hills or otherwise, you’ll quickly see that there probably was an underlying rationality and rationale, not unlike that motivating the snap decision to take the elevator instead of the stairs to the 35th floor. Underlying that decision is a rational rule: “Unless you want exercise or the elevator seems unsafe or otherwise repellent, save time and energy.”

So, what about rational rules governing acceptable meta-costs? I’d like to propose several, all in connection with opportunity meta-costs:

1.    “If calculating opportunity costs does not diminish or otherwise cost you any of the most important opportunities being reviewed, do the calculations.” In more abstract, yet colorful terms, “If you can inspect your cake and eat it too, go for it!”

2.    “Do not forgo opportunity cost calculations, if that will jeopardize your general ability to make such calculations.” This is analogous to the broad behavioral rule “Do not choose to do anything that will impair your ability to choose subsequently”—a mother’s advice to a daughter heading out to a booze-splattered fraternity party.

3.    “If calculating opportunity costs jeopardizes any specific opportunity with very high benefits, do not continue with the calculations beyond vetting the opportunity costs of a small selection choices with presumed comparable value.” Translation into simp-speak: “A good bird in the hand is worth more than too many calculations about others in the bush.”

4.    “If there is some expectation that the opportunity costs associated with a decision or a resource allocation are too great, do the opportunity-cost meta-calculations, unless the opportunity and other costs of doing that are even greater.” Example: “If you’ve got wedding-day jitters, postpone it, unless your fiancée will kill you if you do.”

5.    “If there is some expectation that the opportunity costs associated with a snap decision or resource allocation will be negligible, skip the calculations, unless other costs of doing that are even greater.”

This is equivalent to “The early bird catches the worm…

… unless there’s an equally early cat.”

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